GM Non-Story: Dealer Inventory Build-up Continues

Not that it took keen insight to catch it, but yours truly was one of a very few people who pointed out that General/Government Motors unduly dressed up its financial statements in advance of its late-2010 initial public offering by foisting an unreasonable level of vehicle inventory on dealers. The effect of this was to enable the company, which in accordance with general industry practice recognizes sales when it ships vehicles to dealers, to book an estimated $900 million in sent-ahead pre-tax profit largely not supported by dealer sales.

Contrary to the drawdown or at least level-off I expected after the IPO, GM, with of course virtually no establishment media coverage, has continued to push vehicles out to its dealers to what would appear to be potentially dangerous levels, as seen in the following graphic (HT to Zero Hedge for original):


Dealer inventories are 30% higher than they were on September 30, 2010, the end of the last full quarter before the IPO (624,000 vs. 478,000), and 62% above where they were at the end of 2009 (624,000 vs. 385,000). That would make sense if GM's sales have increased by similar percentages, but they haven't. Sales through November of calendar 2011 are 14% ahead of the first eleven months of 2010. Even if you believe that pre-IPO inventories were justified, it would appear that at least half of the new layer isn't.

On a look-back basis, GM's days' sales in inventory is just shy of 100 days. On a look-forward basis, assuming the next three months' dealer sales beat last year's comparable three months by 10%, it's 84 days.

Assuming a 37%-63% product mix between cars and light trucks (which is the sales mix so far this year), $5,000 in gross profit per car, and $12,000 in gross profit per light truck (consistent with the calculations from a year ago), GM has sent ahead another $1.3 billion in pre-tax profit since September 2010. The next paragraph would seem to indicate that light trucks are an even higher percentage of on-hand inventory, which would mean that the sent-ahead profit number is even larger.

To date only one story I'm aware of (Bloomberg, July 5) has appeared in the establishment press about GM's extraordinary inventory buildup. Industry guidance on prudent inventory levels varies, but it generally suggests that they should be between 45 and 75 days, and definitely not well into the 90s. The Bloomberg item quotes an industry standard of 60 days, along with GM's justification that theirs is appropriately higher (100-110 days for trucks alone) because of the need "to meet demand for different combinations of weight classes, cab types, engines and trim levels." I don't see how that gets you into the 90s, let alone triple digits, unless you have motives beyond having vehicles conveniently available to customers. The Bloomberg article notes that Ford manages to keep days' sales at dealers of its truck lines below 80.

The danger in all of this is that if there is an economy- or gas price-driven sales slump, dealers will start resisting company pressure to keep ordering, and if successful, slow down GM's shipments and ultimately its production lines. That's a danger, thanks to establishment press non-coverage, about which the public is being kept almost completely in the dark.

Cross-posted at

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